Derivatives

How a short strangle on SAIL can work this week

KS Badri Narayanan | Updated on June 12, 2021

Traders can initiate the F&O strategy by selling ₹160-call and simultaneously selling ₹110-put

Though the medium-term outlook for SAIL (₹135.05) has turned positive, in the short-term, we expect the stock to moderate a bit before taking a clear direction. SAIL finds an immediate and strong resistance at ₹139.60. A close above that will trigger a fresh rally on the stock that can lift SAIL to ₹170.60.

On other hand, the stock finds an immediate support at ₹117 and a conclusive close below that will change the short-term outlook negative for SAIL. However, we expect the stock to move in a narrow range in the short term.

F&O pointers: The SAIL June futures at ₹135.70 is in a premium with respect to the spot close of ₹135.05, signalling the existence of long positions. However, despite the underlying stock gaining sharply over the last few days, the counter shed open interest positions, as traders are not willing to carry forward their long positions and book profits instead. Option trading indicates a range of ₹130-150 for the stock.

Strategy: We advise traders to consider a short strangle on SAIL. This can be initiated by selling ₹160-call and simultaneously selling ₹110-put. These options closed with a premium of ₹1.05 and ₹0.30 respectively. That means, this strategy will ensure an inflow of ₹1.35/lot i.e., ₹12,825 (market lot: 9,500 shares per lot).

This strategy is strictly for traders who can withstand wild swings and have deep pockets to meet margin commitments, as the loss could be unlimited while the profit is limited to the premium received i.e., ₹12,825. So risk-averse and novice traders can stay from this strategy. To achieve maximum profit, SAIL has to move between ₹160 and ₹110 during this series. A move above ₹161.35 or below ₹108.65 will start pinching the traders.

Follow-up: Hold Asian Paints short 3200-call.

Note: The recommendations are based on technical analysis and F&O positions. There is a risk of loss in trading.

Published on June 12, 2021

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